How do we set up a royalty agreement with a manufacturer?

We have a product idea that enhances an existing product. Rather than develop and manufacture this product ourselves, we would rather sell it in a royalty arrangement.

Our product increases the usefulness and safety of the existing product. We want to approach a manufacturer of the product and introduce our product to them to see if they would be interested in producing our product and perhaps help us secure a patent. We would like to have a royalty arrangement to be paid per unit sold. We have never been involved in a process like this before. Should we be honest and tell the manufacturer we are novices in this process or try to act as if we know the ropes? How can we protect our idea as we approach manufacturers?

Put simply, yes, you should accept your situation and work with them to secure a deal. That said, there are some preparation points you should take care of prior to going in. Talk about your product design and description with your attorney. It's important to have an outside witness to your product.

Next, aim for a non-compete, non-disclosure being signed before you present it. Now, there's about a 50/50 chance that the company will sign this. I know my companies have a policy of not signing, because most ideas are things we have already got on the table. You have to decide there and then whether you are willing to trust if they don't sign. I would just move ahead.

So, assuming they buy the idea of your product and want to pay you for it, they will either make a lump sum cash offer or a royalty offer like you want. This is where negotiation comes in. Once you have a deal, have the lawyers draw up the papers and move forward. It's not complex but it's also not easy--it depends on negotiation skills.

All the best,
Brad Sugars

Brad Sugars

Brad Sugars is the founder and chairman of ActionCOACH. As an entrepreneur, author and business coach, he has owned and operated more than two dozen companies including his main company, ActionCOACH, which has more than 1,000 offices in 34...